A buy-to-let (BTL) is a property purchase specifically to rent out and receive income as a landlord. It can be a lucrative venture but comes with many challenges, such as investors getting caught between purchasing a property and closing a sale on another.
In times like these, investors rely on numerous short-term financing solutions like bridging finance. This article delves into how bridging finance can help you buy your next BTL property.
What is bridging finance?
Bridging loans or bridging finance is a short-term financial product that produces upfront capital to buy a property while waiting for the proceeds from the sale of another property. As the name suggests, bridging loans bridge the gap between purchasing one property and selling another, ensuring the transaction goes on seamlessly.
Increasing demand in BTL properties
The demand for buy-to-let investors is increasing. Between January and March 2022, one out of every ten properties sold in the United Kingdom had a BTL investment. According to the latest industry figures, BTL landlords purchased 42,980 homes for £8.5 billion during this time period.
How do bridging loans work for buy-to-let investors?
The concept of bridging loans is to afford BTL investors an alternative when their finance is tied up in other transactions, which is a common scenario in the real estate business.
Payments can delay, clients can get cold feet on sale day, property owners can get court orders, etc. These challenges can cut off the financing for new BTL transactions, compelling investors to secure bridging loans.
Lenders release the funds after investors have ticked all the boxes concerning your loan application requirements. The funds can be made available as fast as the application day, and the repayment duration spans 1 to 24 months.
How much can you borrow?
The amount of bridging loan you can borrow usually depends on the equity tied to your property but residential loans can range from £26k to £250m.
Location, location, location
Deciding where to invest is crucial for any BTL purchase. In 2022, a record 73% of London-based landlords purchased buy-to-let properties outside the capital, up from only 24% a decade previously. Investors bought 28% of properties sold in the northeast of England, more than double the amount bought by first-time buyers, representing the largest year-on-year increase in BTL purchases.
The northeast is becoming increasingly appealing to investors since it now has the highest gross yields in the country, averaging 9% versus 6.5% yields on average across England and Wales.
In summary
Bridging loans can be your best bet when purchasing your new BTL property. But bridging loans come with various pros and cons. For instance, you can quickly borrow large sums of money with flexible repayment terms suitable to your BTL transaction. However, bridging loans have higher interest rates than mortgages and other traditional loans. For this reason, they might not work for everyone but if you require the funds fast to ensure you don’t miss your BTL investment opportunity, they may be your best option.